Euro Heads for Summer of Weakness

A two Euro coin is checked after being minted in the Austrian Mint (Muenze Oesterreich) headquarters in Vienna June 20, 2013.

Reuters

Which ever way you cut it, the euro is heading only one way this summer, says Deutsche Bank: down.

Whether you take interest rates, the composition of official reserves around the world, or equity trends, they all point to a summer of weakness against the dollar, says Bilal Hafeez, global head of foreign exchange strategy at the bank–the biggest in the world in the currencies business–in London.

Let’s start with the U.S. interest-rate outlook, the bank advises in a note to clients Friday. When U.S. Federal Reserve chairman Ben Bernanke first confirmed the central bank could start to rein in its stimulus program towards the end of the year, and U.S. Treasury bonds plunged, some strange thing happened to European rates markets.

All things being equal, that should pull the euro down too. “Rate differentials which were providing support for the euro are no longer doing so,” Mr. Hafeez wrote in a research note.

Equities are also pointing at a weaker European currency, following the U.S. outperformance against the euro area.

“The relative trend has actually provided a good leading indication of future euro trends, and currently signals a move down in the euro to $1.28 in the coming month,” Mr. Hafeez said. (We’re now at around $1.30.)

From a medium-term perspective, he added, it will be important to confirm tentative evidence of U.S. investors preferring to invest more at home than abroad, and also of foreign investors shifting from European and Asian equities to the U.S.

Finally, China. According to Mr. Hafeez, Asian reserve accumulation has been among the biggest curve-balls to determine the direction of the euro.

“The likely reduction in reserve accumulation, and possibly even an actual reduction in the level of reserves to defend the renminbi at some point down the line suggest reserve demand for the euro and other non-dollar currencies may be absent,” said Mr. Hafeez.